WTI crude oil experienced a slight drop yesterday, largely a result of continually weak global demand reflected unmistakably in further dire economic data. Consumer demand declines have resulted in seasonally lower refinery utilization numbers as many refiners have opted to close for maintenance, rather than produce products at a weak margin. This has not gone unnoticed as traders have bid up the front-month Rbob gasoline crack to almost $11 while seasonal heating oil demand has pushed the heat crack to above $18.00.
Meanwhile, near-month Brent continues to trade at a premium to WTI. Traders looking to take advantage of this typically short-term phenomenon can look to the options market for a risk-limited play. Based on Thursday’s underlying settlements, the April WTI $60 call can be purchased for a mere $0.10 by selling the same call in Brent. An even safer play would be to buy the April WTI $65/85 call spread for about $0.20 of premium by selling the same call spread in Brent. This trade involves Average Price Options, or “Asian-style”.
Singapore, 09:00
Thursday, January 29, 2009
Singapore JetKero Short Vol Strategy
A weak Dollar vs the Pound and Euro allowed crude markets to show strength in early NY trading before surprisingly bearish US inventory numbers pushed WTI lower. Gasoline stocks showed an equally surprising draw on the back of lower imports and increased refinery shut-ins. The front-month contango (March-April) increased as Opec production cuts appear to have placed a cushion under everything but front-month crude, which is currently at the mercy of weekly inventory numbers.
Implied volatility increased slightly yesterday across the energy complex. Yesterday’s Sing Fuel Oil 180 consumer hedge allowing for premium collection above $212.50 can be replicated in the Sing JetKero complex as well. Looking again at the Feb ’09 through Jan ’10 tenor, the trade pays out an average of $412,500 per 33,000 barrels of Sing JetKero (using a conversion of 6.6 barrels = 1mt) per month at or above the current calendar swap price of about $65. Below $65, the payout begins to decrease until it reaches zero at an average price of $51.25. Below this point, the trade incurs losses. To learn more about this hedge using Sing JetKero, contact us at the info below.
Singapore, 09:00
Implied volatility increased slightly yesterday across the energy complex. Yesterday’s Sing Fuel Oil 180 consumer hedge allowing for premium collection above $212.50 can be replicated in the Sing JetKero complex as well. Looking again at the Feb ’09 through Jan ’10 tenor, the trade pays out an average of $412,500 per 33,000 barrels of Sing JetKero (using a conversion of 6.6 barrels = 1mt) per month at or above the current calendar swap price of about $65. Below $65, the payout begins to decrease until it reaches zero at an average price of $51.25. Below this point, the trade incurs losses. To learn more about this hedge using Sing JetKero, contact us at the info below.
Singapore, 09:00
Tuesday, January 27, 2009
Volatility Hedging Strategies for Sing FO 180
Despite a run-up in equities, energy markets tumbled from recent highs yesterday. API stock figures came out with builds lower than those predicted for WTI and Gasoline, while the protracted and bitter winter in the US Northeast continues to be a lone source of refined products demand, resulting in a draw of 350,000 barrels. Support for WTI is once again around the $40 level- more than $2.00 below the current trading price- reinforcing the strategy of buying puts to protect long swap hedges in the currently volatile markets.
With the Sing Fuel Oil 180 2009 calendar swap now trading well over $260, an example of cheap downside protection against long swap positions can be found in hedges such as the Feb-Aug ’09 $230 put strip, currently offered around $26. The option does not need to be held until expiration to show a profit, a sharp move lower may show profits which can then be unwound against losses in a long swap position.
Similarly, Sing Fuel Oil 180 consumers can find upside protection in a hedge that pays cash as a result of a lack of downward movement with unlimited upside. The trade currently being quoted is a 12 month calendar strip from Feb ’09 through Jan ’10 (it can be adjusted to contain any calendar tenor required). For every 5,000MT, the trade pays out an average of $400,000 per month at or above the current calendar swap price of about $270. Below $270, the payout begins to decrease until it reaches Zero at $212.50. Below this point, the trade incurs losses. Given the current relatively high level of volatility, this hedge allows the consumer to collect large amounts of premium while taking advantage of the relatively low calendar swap price (losses not incurred until below an average calendar swap price of $212.50). With implied volatility in Calendar 2009 approximately around 73%, the lower level price barrier of $212.50 represents a 4.5 standard deviation move.
Singapore, 09:00
With the Sing Fuel Oil 180 2009 calendar swap now trading well over $260, an example of cheap downside protection against long swap positions can be found in hedges such as the Feb-Aug ’09 $230 put strip, currently offered around $26. The option does not need to be held until expiration to show a profit, a sharp move lower may show profits which can then be unwound against losses in a long swap position.
Similarly, Sing Fuel Oil 180 consumers can find upside protection in a hedge that pays cash as a result of a lack of downward movement with unlimited upside. The trade currently being quoted is a 12 month calendar strip from Feb ’09 through Jan ’10 (it can be adjusted to contain any calendar tenor required). For every 5,000MT, the trade pays out an average of $400,000 per month at or above the current calendar swap price of about $270. Below $270, the payout begins to decrease until it reaches Zero at $212.50. Below this point, the trade incurs losses. Given the current relatively high level of volatility, this hedge allows the consumer to collect large amounts of premium while taking advantage of the relatively low calendar swap price (losses not incurred until below an average calendar swap price of $212.50). With implied volatility in Calendar 2009 approximately around 73%, the lower level price barrier of $212.50 represents a 4.5 standard deviation move.
Singapore, 09:00
Thursday, January 22, 2009
US Inventories Surprise Traders
Wednesday’s bullish momentum in the energy complex was dealt a short-term blow yesterday by surprisingly large US inventory builds in both crude and products. WTI March/April contango pushed back out towards -$3.00 but has recovered in early Asian trading to around -$2.40. The near-term contango futures curve remains completely beholden to the excess inventory levels in Cushing, Oklahoma. Until demand can consume this surplus, any recovery in the contango structure will be short-lived.
After two major spikes higher in January, Sing JetKero looks to be testing support on the downside. The March ’09 contract can possibly form a double-bottom if support remains strong around the current $55.50 level. If so, look for a quick recovery across the Cal09 swap, making now an excellent time for consumers to use 3-way option structures to maintain unlimited upside protection with limited downside risk. Indications: The Sing JetKero March-December09 $80 call strip can be purchased for Zero Cost by selling the $42/57 put spread strip in the same tenor. This hedge allows for unlimited upside protection above $80 in every month from March through December in 2009. On the downside, risk is limited to only $15 through the use of a put spread strip (instead of the traditional costless collar structure where a naked put strip is sold to finance the call purchase).
Singapore, 09:00
After two major spikes higher in January, Sing JetKero looks to be testing support on the downside. The March ’09 contract can possibly form a double-bottom if support remains strong around the current $55.50 level. If so, look for a quick recovery across the Cal09 swap, making now an excellent time for consumers to use 3-way option structures to maintain unlimited upside protection with limited downside risk. Indications: The Sing JetKero March-December09 $80 call strip can be purchased for Zero Cost by selling the $42/57 put spread strip in the same tenor. This hedge allows for unlimited upside protection above $80 in every month from March through December in 2009. On the downside, risk is limited to only $15 through the use of a put spread strip (instead of the traditional costless collar structure where a naked put strip is sold to finance the call purchase).
Singapore, 09:00
Wednesday, January 21, 2009
Fresh Uncertainties
A new sense of uncertainty has entered the energy complex this week as signs of oversupply appear to be topping out. The contango in March/April ’09 WTI has now dropped to less than -$2.00 as a result of the sharp rally in March futures above $43.50 yesterday, while longer-dated contracts such as December ’10 are now below $60. Global refined product demand continues to decline but the contango reversal can be considered a sign that a near-term bottoming out in front-month contracts may be occurring. While it is early to predict a drawdown in light, sweet inventories, Opec nations continue to enforce deep supply cuts which, while currently impacting the Brent/Dubai EFS most noticeably, will eventually follow-through onto the Brent and WTI global benchmark contracts.
Sing Fuel Oil implied volatility ticked higher yesterday as near-term contracts crested the $250 level and pushed towards resistance around $260. Increases in option premium often result in relatively cheaper spread strategies appealing to consumer hedgers. Done as a costless 3-way, these strategies provide limited upside protection with zero premium at risk within a certain price band. Indications: The Sing Fuel Oil 180 Q209 $260/320 call spread strip is currently offered at $21.00. To own the call spread strip for zero cost, the $209 put strip can be sold in the same tenor. Note: The term “strip” denotes an option structure trading in a number of months for an average price. Thus, buying the Q209 $260 call strip for $40.00 means that the owner has purchased the $260 call in April, May and June for an average price of $40.00 per month.
Singapore, 09:00
Sing Fuel Oil implied volatility ticked higher yesterday as near-term contracts crested the $250 level and pushed towards resistance around $260. Increases in option premium often result in relatively cheaper spread strategies appealing to consumer hedgers. Done as a costless 3-way, these strategies provide limited upside protection with zero premium at risk within a certain price band. Indications: The Sing Fuel Oil 180 Q209 $260/320 call spread strip is currently offered at $21.00. To own the call spread strip for zero cost, the $209 put strip can be sold in the same tenor. Note: The term “strip” denotes an option structure trading in a number of months for an average price. Thus, buying the Q209 $260 call strip for $40.00 means that the owner has purchased the $260 call in April, May and June for an average price of $40.00 per month.
Singapore, 09:00
Monday, January 19, 2009
Sing Fuel Oil Implied Volatility Softens
Gloomy economic data has combined with large inventory builds to maintain heavy downward pressure on energy markets. However, demand can be expected to appear in the Northeast US as an already cold winter turns doubly frigid. Aggressive production cuts from Opec may do no more than keep the bottom from falling out of the energy markets. The unfortunate bank-Armageddon state of affairs looks set to continue with nationalization rumours swirling around RBS and possibly a large American bank.
The softening of implied volatility and thus option premiums continues to be the catalyst for hedgers to re-enter the market. For more than two weeks, Feb ’09 Sing Fuel Oil 180 cst has been trading in a tight range between $240 and $260 with only a short break-out push towards $280 before quickly falling back below $260 again. This type of consolidation allows for less risk in consumer hedging strategies such as buying costless collar strips. The Feb-July $280 call strip can be purchased for zero cost by selling the $235 put. Similarly, for consumer hedgers looking for slightly less volatility, the Feb-July $300 call strip can be purchased for zero cost by selling the $223 put.
Singapore, 09:00
The softening of implied volatility and thus option premiums continues to be the catalyst for hedgers to re-enter the market. For more than two weeks, Feb ’09 Sing Fuel Oil 180 cst has been trading in a tight range between $240 and $260 with only a short break-out push towards $280 before quickly falling back below $260 again. This type of consolidation allows for less risk in consumer hedging strategies such as buying costless collar strips. The Feb-July $280 call strip can be purchased for zero cost by selling the $235 put. Similarly, for consumer hedgers looking for slightly less volatility, the Feb-July $300 call strip can be purchased for zero cost by selling the $223 put.
Singapore, 09:00
Energy Markets Pulled in Opposite Directions
Aside from February WTI, energy prices consolidated and in many cases pushed higher last week amid further evidence of follow-through on supply cuts from Opec producer nations. Consumer demand looks set to continue dropping through 2009 as the International Energy Agency fell into line with Opec and the US Department of Energy in predicting back-to-back years of falling oil demand. The combination of drastic supply cuts with continuing global economic turmoil leading to receding consumer demand will certainly inject uncertainty and thus volatility into the energy markets for some time to come.
For the moment, implied volatility has decreased due to last week’s underlying price action. Consolidation has resulted in cheaper option premiums, temporarily allowing hedgers to lock in long-term hedges at relative bargain prices. Using Asian options, the WTI Feb through December 2009 $65/85 call spread strip can be purchased for an average price of about $2,750 per 1000 barrels per month. By selling the $44 put in the same tenor, the call spread strip can be owned for Zero Cost thus providing the full $20,000 of consumer protection per month. The Feb-Dec underlying calendar swap is currently trading above $53.00, thus allowing for an average downside buffer of more than $9.00 paired with maximum upside protection of $220,000 per contract.
Singapore, 09:00
For the moment, implied volatility has decreased due to last week’s underlying price action. Consolidation has resulted in cheaper option premiums, temporarily allowing hedgers to lock in long-term hedges at relative bargain prices. Using Asian options, the WTI Feb through December 2009 $65/85 call spread strip can be purchased for an average price of about $2,750 per 1000 barrels per month. By selling the $44 put in the same tenor, the call spread strip can be owned for Zero Cost thus providing the full $20,000 of consumer protection per month. The Feb-Dec underlying calendar swap is currently trading above $53.00, thus allowing for an average downside buffer of more than $9.00 paired with maximum upside protection of $220,000 per contract.
Singapore, 09:00
Wednesday, January 14, 2009
Singapore Fuel Oil 180 Options
Hudson Capital Energy is now making markets in Nymex cleared Sing FUEL OIL 180 Asian-style options. As with the newly clearing JetKero options, the ability to create and price structures such as Costless Collars in just seconds during Asian trading hours will help us provide shipping companies and bunker traders with enormous liquidity in this once opaque OTC-only market. This note is part of a Singapore Products Report our group will be distributing twice per week to possible counterparties who may be interested in trading Sing Fuel Oil 180 options.
Similar to the JetKero market, Singapore Fuel Oil 180 swaps rebounded in mid-December after falling from spectacular highs of around $800 per Metric Ton during the summer. The market seemed to find a bottom in early December before rebounding somewhat around the Christmas holiday. The futures curve now appears to be trending higher with the March 2009 contract forming a double bottom around the $200 level. As with WTI and similar energy markets, the trend now appears to be consolidation after 5 months of unrelenting price drops. It is this consolidation that has helped to bring about a relative drop in implied volatilities.
Hedgers who bought swaps during the market fall would have benefitted enormously from the purchase of cheap downside puts. It is this simple stop-loss strategy that may help hedgers who choose to short the market at these lower levels by selling swaps. Cheap upside calls are available to limit losses on short swap positions (limiting hedging losses regardless of physical exposure). The Feb09-June09 $300 call strip is valued around $31.00 with the underlying calendar swap settling just under $265. This option position does not need to be held until expiration, any sharp move higher in the FO market will result in an increase in value for these calls, which can then be sold out and the profits used against the losses from the short swap. Of course, as expiration approaches, the options will begin to lose value at an increasing rate. The call strip value can be cut almost in half to approximately $18.00 of exposure by selling the $200 put in the same tenor. This trade will result in the hedger getting long below $200, thus cancelling out the protection from the short swap at that point.
Singapore, 09:00
Similar to the JetKero market, Singapore Fuel Oil 180 swaps rebounded in mid-December after falling from spectacular highs of around $800 per Metric Ton during the summer. The market seemed to find a bottom in early December before rebounding somewhat around the Christmas holiday. The futures curve now appears to be trending higher with the March 2009 contract forming a double bottom around the $200 level. As with WTI and similar energy markets, the trend now appears to be consolidation after 5 months of unrelenting price drops. It is this consolidation that has helped to bring about a relative drop in implied volatilities.
Hedgers who bought swaps during the market fall would have benefitted enormously from the purchase of cheap downside puts. It is this simple stop-loss strategy that may help hedgers who choose to short the market at these lower levels by selling swaps. Cheap upside calls are available to limit losses on short swap positions (limiting hedging losses regardless of physical exposure). The Feb09-June09 $300 call strip is valued around $31.00 with the underlying calendar swap settling just under $265. This option position does not need to be held until expiration, any sharp move higher in the FO market will result in an increase in value for these calls, which can then be sold out and the profits used against the losses from the short swap. Of course, as expiration approaches, the options will begin to lose value at an increasing rate. The call strip value can be cut almost in half to approximately $18.00 of exposure by selling the $200 put in the same tenor. This trade will result in the hedger getting long below $200, thus cancelling out the protection from the short swap at that point.
Singapore, 09:00
Volatility falls off a cliff
Crude volatility was down sharply, 10% today, down from 86 to 76. February crude options expired today and the Feb-March crude spread remains wide at $7.00. Financial markets in general were down sharply with negative news from the retail sector and major banks.
Heating oil inventory builds were much higher than expected (+6MN bbls) following weekly data released today. The strong distillate cracks have been supported by European natural gas tightness and cold weather systems both in Europe and northeastern United States. With this large build in distillates, the market took heat cracks off by $1.75. The RBOB improved by $1.5, pushing it very high versus the last 3 months.
We feel that there is limited downside here and calls will become more expensive versus puts soon. This is a good time to think about buying calls as the general market sentiment remains bearish (for now). We may test new lows, but that reinforces a call or call spread buying strategy versus long futures or swaps.
New York, 16hoo.
Tuesday, January 13, 2009
Singapore JetKero Options
Hudson Capital Energy is now making markets in Nymex cleared Sing JetKero Asian-style options. The ability to create and price structures such as Costless Collars in just seconds during Asian trading hours will help us provide Airlines and interested hedgers with enormous liquidity in this once opaque OTC-only market. This note is part of a Singapore Products Report our group will be distributing twice per week to possible counterparties who may be interested in trading Sing JetKero options.
Singapore JetKero swaps rebounded in late December after falling from highs of greater than $180 per barrel during the summer. The February contract bounced off the $55 level and later built support at $60, after hitting this level twice (the second week of December and again late last week). Looking further back along the contango futures curve, August09 bottomed out just below $65 and looks to be building support around the $70 level. It is this consolidation (not only in JetKero, but also in similar regional products markets) that has resulted in a decrease in implied volatilities, thus making option structures more attractive.
Fiscal stimulus in China will eventually impact consumer demand, increasing travel and therefore JetKero demand. The same is true in both the United States and Europe. Airlines looking to protect their fuel requirements for the remainder of 2009 can look to the Sing JetKero Feb09-Dec09 $57/90 Costless Collar. With the calendar swap trading above $69.00, this hedge provides a downside average buffer of approximately $12.00 with unlimited upside protection above $90.
Singapore, 10:00
Singapore JetKero swaps rebounded in late December after falling from highs of greater than $180 per barrel during the summer. The February contract bounced off the $55 level and later built support at $60, after hitting this level twice (the second week of December and again late last week). Looking further back along the contango futures curve, August09 bottomed out just below $65 and looks to be building support around the $70 level. It is this consolidation (not only in JetKero, but also in similar regional products markets) that has resulted in a decrease in implied volatilities, thus making option structures more attractive.
Fiscal stimulus in China will eventually impact consumer demand, increasing travel and therefore JetKero demand. The same is true in both the United States and Europe. Airlines looking to protect their fuel requirements for the remainder of 2009 can look to the Sing JetKero Feb09-Dec09 $57/90 Costless Collar. With the calendar swap trading above $69.00, this hedge provides a downside average buffer of approximately $12.00 with unlimited upside protection above $90.
Singapore, 10:00
Implied Vols Retreat
With just a few days until expiration, February ’09 WTI pushed back up towards $40 as political pressure has increased for a larger US government stimulus package and direct capital injections. Despite trading below $40, the possible effect of any stimulus package is evident in the contango futures curve, with the entire WTI curve beyond April ‘09 trading above $50. The Brent curve trades above $50 after March ’09. Floating storage to be released upon the market throughout 2009 will continue to have a price dampening effect, while geopolitical issues such as the as yet unresolved Russia/Ukraine gas spat and the tinderbox-like war between Israel and Hamas in Gaza persist in requiring a premium of the energy markets.
The lack of sharp movement in the last few trading days has resulted in a drop in implied volatility. Consumer hedgers searching for bargains can look to the WTI Feb09-June09 $60/75 call spread strip, currently trading around an average price of $2,600 per 1000 barrels per month. The hedge can be made costless by selling the $43 put in the same tenor.
Singapore, 09:00
The lack of sharp movement in the last few trading days has resulted in a drop in implied volatility. Consumer hedgers searching for bargains can look to the WTI Feb09-June09 $60/75 call spread strip, currently trading around an average price of $2,600 per 1000 barrels per month. The hedge can be made costless by selling the $43 put in the same tenor.
Singapore, 09:00
Opportunities in a Contango Market
The geopolitical premium continues to bleed out of crude prices as Russia and Ukraine look to settle their dispute and resume gas flows. Last week’s poor US unemployment figures continue to reinforce weak consumer demand while traders await further data this week with a sense of trepidation. Along with CPI and PPI numbers, retail demand and industrial production data look set to drag equity and commodity markets lower. The only bright spot in terms of consumer demand may be that as worse economic data is released, the US Congress may be motivated to push for faster action on a larger stimulus plan.
Opec production cuts, near- to medium-term consumer demand destruction and excessive crude inventories contribute much to the current contango market structure. Traders looking for continued weakness in the near-term with the possibility of recovery in the longer-term can take advantage of structures such as the Feb09 through June09 $35 put strip with the July09 through Dec09 $85/95 call spread strip. The combined structure is currently trading around only $2,800 per 1000 barrels per month. This trade provides near-term downside exposure (the Feb-June underlying calendar strip is trading just below $49.00) while also providing long-term upside exposure (July-Dec underlying calendar strip is trading around $55.50) with only $2,800 per month at risk.
Singapore, 09:00
Opec production cuts, near- to medium-term consumer demand destruction and excessive crude inventories contribute much to the current contango market structure. Traders looking for continued weakness in the near-term with the possibility of recovery in the longer-term can take advantage of structures such as the Feb09 through June09 $35 put strip with the July09 through Dec09 $85/95 call spread strip. The combined structure is currently trading around only $2,800 per 1000 barrels per month. This trade provides near-term downside exposure (the Feb-June underlying calendar strip is trading just below $49.00) while also providing long-term upside exposure (July-Dec underlying calendar strip is trading around $55.50) with only $2,800 per month at risk.
Singapore, 09:00
Monday, January 12, 2009
Opec Follow-through Seen in Brent/Dubai EFS
Crude prices ended last week in negative territory with WTI looking set to test the $40 level in early Asian trading Monday morning. Meanwhile, Brent, the North Sea benchmark also traded lower on the week but the WTI/Brent spread has now widened to almost $4 with Brent premium. Similarly, the Brent/Dubai spread has moved into negative territory. These atypical contract moves are a result of follow-through on the part of the Opec producers; the cartel has reduced the supply of their heavy, sour crude oil to the market, while the light, sweet contracts (WTI in particular) are suffering from a supply glut.
The above situation may take several months to play itself out, but the pattern is clear: less oil is coming to the market and those contracts directly concerned are rallying. Hedgers are beginning to take advantage of this phenomenon by buying upside protection for the 2nd half of 2009. Often the protection is cheap enough that it can be made Zero-Cost by selling a put significantly lower than the current market. For instance, the 2H09 WTI $75/90 call spread strip is trading around $2,800 per 1000 barrels per month. For a Zero-Cost strategy, sell the $40 put in the same tenor. With the 2H09 calendar strip trading above $57.50, this consumer hedge provides an average of more than $17.50 of room on the downside.
Singapore, 05:00
The above situation may take several months to play itself out, but the pattern is clear: less oil is coming to the market and those contracts directly concerned are rallying. Hedgers are beginning to take advantage of this phenomenon by buying upside protection for the 2nd half of 2009. Often the protection is cheap enough that it can be made Zero-Cost by selling a put significantly lower than the current market. For instance, the 2H09 WTI $75/90 call spread strip is trading around $2,800 per 1000 barrels per month. For a Zero-Cost strategy, sell the $40 put in the same tenor. With the 2H09 calendar strip trading above $57.50, this consumer hedge provides an average of more than $17.50 of room on the downside.
Singapore, 05:00
Friday, January 9, 2009
RBOB crack shows signs of strength
Following a tumultuous week of market action, RBOB closed the week stronger due to refinery turnaround news and macro index fund rebalancing. Data shows that most petroleum product contracts including crude had to be reduced to rebalance indexes while RB was increased. Distillate cracks had been stronger as NG markets rallied in Europe due to Russian supply concerns. Demand remains weak across the board, which muted the early week rally despite Gaza conflicts. Furthermore, unemployment data in the US reported today was slightly worse than expected, pressuring most markets lower.
Continued RB strengthening may be hedged with calls here, or puts hedging long physical. We are now finally in positive RB crack in the futures market. In general, crude does not look like a great hedge against refined products now as crack volatility remains high.
New York 15h00.
Continued RB strengthening may be hedged with calls here, or puts hedging long physical. We are now finally in positive RB crack in the futures market. In general, crude does not look like a great hedge against refined products now as crack volatility remains high.
New York 15h00.
Wednesday, January 7, 2009
Distillate cracks stonger despite market selloff
A New Year rally has not followed through at this point with a near $6 sell off. This week, however, the news regarding natural gas availability in Europe (Russia) has had an important and significant affect on Gasoil prices (US Heat and Jet). The "crack" (difference of distillate prices such as Jet compared to crude) has expanded by over $3 per barrel due in part to the fact that Europeans pay for natural gas and heating oil (gasoil) with interrelated pricing schemes. The prices are interrelated due to switching ability in the heating market.
Additionally, we are seeing strong indications for a cold winter in Europe, which will support this "crack" expansion.
This situation could persist. With this in mind, using some near term gasoil or heating oil call options strategies would be more effective than crude oil. Longer term, we continue to recommend crude oil call spreads.
Please call or email if there is a particular level you are looking to refresh.
New York 16h13
Tuesday, January 6, 2009
Implied Vol Relaxes
Evidence of Opec production cuts continues to mount with the Brent/Dubai EFS trading at parity. Typically, the lower quality, sour crude of the Dubai benchmark would trade at a discount to Brent or WTI. The narrowing of the spread is a strong indicator of follow-through on the part of regional producers. Meanwhile, geopolitical risks continue to increase as there appears no peaceful end in sight to the Israeli/Gaza conflict and the Russia/Ukraine spat has now spread into the EU, with Russia cutting back gas it claims Ukraine is siphoning off for itself.
Despite the current market uncertainties, implied volatility has dropped off markedly in WTI and Brent options. The cheaper premiums have encouraged hedgers to re-enter the market during the current period of flux. Producer hedgers have looked again to medium-term downside protection in the form of the WTI Cal09 $35/45 put spread strip, currently trading around $2,300 per 1000 barrels per month. This put spread strip can be made Costless by selling the $90 call in the same tenor. The Cal09 swap strip is currently trading around $58.50.
Email, call or IM for further strategies and quotes.
Singapore, 09:00
Despite the current market uncertainties, implied volatility has dropped off markedly in WTI and Brent options. The cheaper premiums have encouraged hedgers to re-enter the market during the current period of flux. Producer hedgers have looked again to medium-term downside protection in the form of the WTI Cal09 $35/45 put spread strip, currently trading around $2,300 per 1000 barrels per month. This put spread strip can be made Costless by selling the $90 call in the same tenor. The Cal09 swap strip is currently trading around $58.50.
Email, call or IM for further strategies and quotes.
Singapore, 09:00
Monday, January 5, 2009
Geopolitical Tensions Back in Focus
Geopolitical tensions continue to put upward pressure on energy markets as Feb09 WTI and Brent crude both rallied closer to the $50 level. Renewed militant attacks in Nigeria on Eni operated pipelines come as the Israeli/Gaza conflict looks set to worsen. Meanwhile, Russian and Ukraine have yet to settle their Natural Gas spat as the EU looks into possible siphoning off of gas by the latter country. Further evidence of Opec supply cuts are evident in the tightening of the Brent/Dubai EFS, now at its narrowest level in eight years. The heavy, sour crude of the Dubai Middle East contract is a superior indicator than that of Western benchmarks such as WTI or Brent in the short-term regarding any production cuts by regional producers.
Cheap, near-term upside protection still remains in the Q109 WTI $60/75 call spread strip. Trading around only $2,000 per 1000 barrels per month, this consumer strategy offers total protection of $39,000 with only $6000 at risk. The strip can even be made Costless by selling the $46 put in the same tenor. With the Q109 calendar strip trading above $52.50, the Zero-Cost strategy provides an average downside buffer of about $6.50.
Singapore, 09:00
Cheap, near-term upside protection still remains in the Q109 WTI $60/75 call spread strip. Trading around only $2,000 per 1000 barrels per month, this consumer strategy offers total protection of $39,000 with only $6000 at risk. The strip can even be made Costless by selling the $46 put in the same tenor. With the Q109 calendar strip trading above $52.50, the Zero-Cost strategy provides an average downside buffer of about $6.50.
Singapore, 09:00
New Year Rally keeps volatility high
Following late 2008 inventory reduction strategies and a general bearish sentiment, it is not hard to believe a correction or bounce was due. The Israeli confrontations with Hamas in Gaza were more than enough news to help the market sustain a rally. Now we are seeing plenty of upside hedges coming in, taking advantage of put skew (calls cheaper in comparison, and selling puts to finance appears a good tradeoff).
Volatility remains high by historic standards in the low 90s (%). The high level of volatility still provides a good opportunity to those who can use a 3 way strategy (selling 1 option net) to achieve low cost hedges. One such idea is to buy a call spread and sell a put such as the WTI Q1 62-72 call spread versus the $40 put for zero cost. The current swap reference for Q1 is $52. This is more of an insurance trade but accepts a $40 floor, which is near the marginal cost for many producers outside the Middle East (such as Canada).
Please call or email for current information or stratgies.
New York 415pm
Volatility remains high by historic standards in the low 90s (%). The high level of volatility still provides a good opportunity to those who can use a 3 way strategy (selling 1 option net) to achieve low cost hedges. One such idea is to buy a call spread and sell a put such as the WTI Q1 62-72 call spread versus the $40 put for zero cost. The current swap reference for Q1 is $52. This is more of an insurance trade but accepts a $40 floor, which is near the marginal cost for many producers outside the Middle East (such as Canada).
Please call or email for current information or stratgies.
New York 415pm
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